Real exchange rate dynamics in transition economies |
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| Affiliation: | 1. Department of Economics, University of Siena and Central European University, Budapest, Hungary;2. Faculty of Economics, University of Ljubljana, Ljubljana, Slovenia;1. Krannert Institute of Cardiology and Division of Cardiology, Department of Medicine, Indiana University School of Medicine, Indianapolis, Indiana;2. Department of Pediatrics, Riley Heart Research Center, Indiana University School of Medicine, Indianapolis, Indiana;3. Departments of Medicine (Cardiology), Physiology, David Geffen School of Medicine at the University of California, Los Angeles, California;4. Cedars-Sinai Medical Center, Los Angeles, California;1. Department of Physics and Astronomy, The University of Western Ontario, London N6A 3K7, Canada;2. Astronomical Institute, Academy of Sciences of the Czech Republic, Ondrejov CZ-25165, Czech Republic;1. The School of Biosciences, Division of Agricultural and Environmental Sciences, The University of Nottingham, Sutton Bonington Campus, Sutton Bonington, Leicestershire LE12 5RD, UK;2. School of Geography, University of Nottingham, Nottingham NG7 2RD, UK;1. CEFER and Vilnius University, Lithuania;2. Bank of Lithuania, Lithuania |
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| Abstract: | The paper analyzes the phenomenon of real exchange rate appreciation that has characterized transition economies. It is shown that the real exchange rate—measured as the relative price of tradables in terms of non-tradables—is affected by adverse initial conditions and structural reforms only in the first 5 years of the transition process. After that period, the so-called Balassa–Samuelson effect seems to dominate the real exchange rate determination. The paper discusses the implications for exchange rate policy and concludes that while for countries of the former Soviet Union a flexible exchange rate regime seems desirable, for Central and Eastern Europe countries a stable exchange rate and even an early move to the adoption of the euro should be considered. |
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